Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Fed Caused the Stock Market Sell-Off—but Not with Rate Hikes

Stock-Markets / Stock Markets 2019 Jan 17, 2019 - 03:56 PM GMT

By: John_Mauldin

Stock-Markets

I recently argued Jerome Powell did the right thing by raising rates a mere 25 basis points.

He did what Janet Yellen should have done years ago. And for the first time since Volcker, a Fed chair declared the Fed’s independence from the market and politicians.

Besides the Fed’s dual mandate, Greenspan, Bernanke, and, in particular, Yellen had a third unofficial mandate. It was to make sure that asset prices keep rising.


Now, of course, that’s not the way they would express it. But that is what they did.

This created a series of bubbles, which inevitably blew up. The elites made their fortunes. But those who didn’t know better and could least afford losses got screwed.

And then they had the hubris to take credit for fixing the crises they created. Exactly like the arsonist taking credit for fixing the fire he started. They have no shame.

We should not be where we are today. And we would not be here today, if the Fed didn’t screw up.

The Most Stupid Policy Mistake

Now, having said Chairman Powell did the right thing, let me tell you where he and the current Fed leaders are royally making a mess. This is critically important.

No serious scientist would run a two-variable experiment. By that I mean, you run an experiment with one variable to see what happens.

If you have two variables and something happens—either good or bad—you don’t know which variable caused it.

You first run the experiment with one variable, then do it again with the second one. After that, you have the knowledge to run an experiment with both.

And yet, the Fed is running a two-variable experiment. It is decidedly the stupidest monetary policy mistake in a long line of Fed mistakes.

What are the two variables?

They are raising interest rates (albeit slowly) and aggressively reducing its balance sheet. I think many of today’s problems are results of this combination. It should do one or the other, not both.

Rate Hikes Are Not to Blame

Everyone blames the last rate hike for volatility. But let’s look at the other variable.

The Fed is radically reducing its balance sheet. The European Central Bank is also ending its QE (quantitative easing), as are other central banks.

In effect, they are taking away the market’s crack cocaine.

All of the QE began to disappear worldwide toward the beginning of October. While I realize correlation is not causation, I find it suspicious that the markets turned volatile about that same time.

It makes sense that the balance sheet reduction is as responsible for the market volatility as the increased rates. If QE made the markets go up, then it’s no surprise that its ending makes the markets fall.

Let’s get real.

The Fed Funds target is now at 2.25%, barely above inflation. Zero real interest rates mean they are still giving away free money. And free money causes bubbles.

If Powell was trying to “lean into the market” and cut off budding inflation (that frankly I don’t see), he would have rates at 4% or 5%. Now that would mean we should blame the Fed for pushing us into recession and other bad things.

But, in fact, rates are still barely over inflation. Janet Yellen should have had them there four $#%%!@#$$ years ago.

You want to castigate someone? You want to point fingers? Janet Yellen and the two previous Fed chairs are good places to start.

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in